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Reducing Urban Road Transportation Externalities: Road Pricing in Theory and in Practice Downloaded from Alex Anas* and Robin Lindseyy 66 Symposium: Transportation and the Environment Reducing Urban Road Transportation Externalities: Road Pricing in Theory and in Practice Downloaded from Alex Anas* and Robin Lindseyy Introduction http://reep.oxfordjournals.org/ Urban road transportation causes several major negative externalities. First, the costs of green- house gas emissions from motorized private and public vehicles are borne globally. Second, other air pollutants and noise from urban road transportation affect road users and others locally. Third, while the costs of congestion (time delays and extra fuel consumption), accidents, and infrastructure damage are largely borne by motorists collectively, there is still an externality because individual motorists increase these costs for other motorists. Because of these exter- nalities, motorists do not bear the full social marginal costs of driving and they drive too much. Urban road transportation causes several other externalities as well, including water pollu- at Technical Services - Serials on October 6, 2016 tion, vibrations, and visual intrusion. Roads also create a barrier to bicyclists and pedestrians. Moreover, when parking is underpriced, the time spent searching for parking, excessive use of land for parking, the contribution to the urban heat island effect, and problems of drainage can besignificantinurbanareas(Shoup2005).Inaddition,fuelconsumptioncanimposecostsatthe national level due to monopsony power in the world oil market and energy insecurity, although by most estimates the average costs are small (Bickel et al. 2006; Delucchi and McCubbin 2009). Many policy instruments can be used to control road transportation externalities, but all have their limitations. In the United States, vehicle emissions standards and ceilings on regional air quality have helped reduce emissions per vehicle kilometer. Regulating vehicle safety, building *Department of Economics, State University of New York at Buffalo, 415 Fronczak Hall, North Campus, Amherst, NY 14260, USA. Telephone: 716-645-8663; Fax: 801-749-7805; e-mail: [email protected]. ySauder School of Business, University of British Columbia, 2053 Main Mall, Vancouver, British Columbia, Canada V6T 1Z2. Telephone: 604-822-3323; Fax: 604-822-4977; e-mail: [email protected]. We are indebted to Charles Kolstad, Suzy Leonard, Stef Proost, and two anonymous referees for helpful comments and suggestions. Anas gratefully acknowledges the support of research award RD-83184101-0 from the United States Environmental Protection Agency and the Multi-campus Research Program and Ini- tiative grant from the Office of the President, University of California, award number 142934. Lindsey grate- fully acknowledges financial support from the Social Sciences and Humanities Research Council of Canada. The views expressed in the article are solely those of the authors and not those of the financial supporters. Review of Environmental Economics and Policy, volume 5, issue 1, winter 2011, pp. 66–88 doi:10.1093/reep/req019 Advance Access publication on June 16, 2011 Ó The Author 2011. Published by Oxford University Press on behalf of the Association of Environmental and Resource Economists. All rights reserved. For permissions, please email: [email protected] Reducing Urban Road Transportation Externalities 67 saferroads,stricterenforcementoftrafficrules,andexperienceratingofinsurancepremiumshave all helped reduce accident rates per kilometerdriven. But building safercars can induce faster and less careful driving, and regulations mandating greater vehicle fuel efficiencycan cause a rebound effect when a reduction in the monetary cost of driving per kilometer induces more driving. The cost of driving depends on distance driven, road and vehicle characteristics, regulations, and level of congestion. Vehicle sales taxes and registration and licensing fees entail fixed charges that do not vary with distance driven. Fuel taxes offer a first-best instrument for internalizing the costs of CO2 and other greenhouse gas emissions, as well as air pollution costs that are propor- tional to fuel consumption. However, fuel-related externalities generally account for a small frac- tion of the total external societal costs of driving. Tsekeris and Voß (2008), Parry (2009), estimate Downloaded from that for light-duty vehicles in the United States, fuel-related externalities are eighteen cents per gallon, compared to time-delay and other distance-related costs of $2.10 per gallon (converted using average vehicle fuel economy). In addition, the costs of congestion and accidents vary widely, whereas fuel use is relatively insensitive to time of day, type of road, and traffic volume. http://reep.oxfordjournals.org/ Fuel taxes per kilometer of driving decrease with vehicle fuel economy, but the time-delay costs of congestion are little related to fuel economy. Moreover, high fuel taxes induce switching to fuel- efficient, electric, and alternative fuel vehicles and therefore become less effective at reducing travel over time. In many developing countries with rapidly rising incomes, values of time are rising and the time-delay externality of congestion is increasing more quickly than other costs. The problem of traffic congestion has been addressed by building new roads; improving public transportation, traffic control, and other travel demand management policies; adop- at Technical Services - Serials on October 6, 2016 tion of advanced traveler information systems;1 and land-use planning. But these measures can make driving cheaper and more pleasant, which encourages additional driving. While these policies may reduce the level of congestion, and thus the gap between marginal social and average private costs, excess congestion still remains. According to the theory of welfare economics and externalities pioneered by Pigou (1920), a tax or toll is needed to correct the externalities of urban road transportation. Road pricing has two advantages over command-and-control policies such as bans on driving and restric- tions on the days when a vehicle can be driven (based on license plate numbers). First, it induces adjustments in trip frequencies, destination, mode, and time of day and route, as well as in long-run location decisions. Second, road pricing can be varied with the magnitude of the congestion externality according to place, time of day, and type of vehicle. Most previous studies of urban road pricing have focused on its role in relieving conges- tion. Only recently has attention turned toward using road pricing as an instrument to im- prove air quality. This article, which is part of a symposium on Transportation and the Environment, examines the environmental as well as the congestion relief benefits of road pricing in theory and in practice.2 Our discussion does not include the specialized topics of 1Advanced traveler information systems refers to a broad array of sources that provide information about travel conditions, such as Internet websites, 511 phone systems in the United States, cell phones, and other handheld devices. 2The other two articles in this symposium are Proost and Van Dender (2011), who examine projections of the future demand for road transport and assess long-term policy issues and options, and Anderson et al. (2011), who examine the impacts and efficiency of automobile fuel economy regulations in the United States and other countries. 68 A. Anas and R. Lindsey revenue generation, pricing of parking congestion, private toll roads, pay-as-you-drive car insurance, and truck tolls. Rather, we address four broad issues related to urban road pricing. First, real-world pricing schemes are imperfect and there is no guarantee that their benefits will exceed their setup and operating costs (Eliasson 2009). Thus, it is important to identify the effects of existing schemes and assess whether their benefits exceed their costs. Second, road pricing can yield environmental benefits that the public supports. According to Oberholzer- Gee and Weck-Hannemann (2002), for example, people are generally more interested in cleaner air than in congestion relief. This raises the second issue, which is how the potential environmental benefits from road pricing compare to the congestion relief benefits. Third, as Thomson (1977) noted, public transport provides a sort of ‘‘safety valve’’ for traffic congestion. Downloaded from To date, all urban road congestion pricing schemes have been implemented in cities with good public transport (e.g., Singapore, London, Stockholm). Thus, it is important to examine how the availability of good urban public transport affects the impact and acceptance of road pric- ing policies. Finally, there have been conflicting views on the viability of road pricing (e.g., see http://reep.oxfordjournals.org/ Borins 1988 versus Richards 2008). This leads to the fourth issue we address, which is to iden- tify the conditions under which urban road pricing is likely to be both economically attractive and politically feasible and to determine whether such policies are likely to become widespread in the foreseeable future. Our review is organized as follows. The next section discusses road pricing theory and policy options. This is followed by a review of experience with urban road pricing schemes in Singapore, London, Stockholm, and Milan. The next section discusses the distributional at Technical Services - Serials on October 6, 2016 impacts and public acceptance of road pricing. The final section summarizes the main find- ings of the review and offers some thoughts
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